SINGAPORE: The recent escalation of trade tensions between the US and China will further cloud the trade and economic outlook in Asia, with a predominantly negative effect at the sector level, said Moody’s Investors Service in a new report.

At the same time, US importers will continue to divert some trade away from China over time, a credit positive for some economies and sectors in the region.

“The US-China trade dispute has significantly weakened the bilateral merchandise trade flows between the US and China, with spillover effects already spreading across Asia,“ said Michael Taylor, a Moody’s managing director and chief credit officer for Asia Pacific.

Moody’s said the trade dispute’s spillovers are mainly concentrated on exports of intermediate inputs and capital goods to China through integrated supply chains. Computers and electronics, and to a lesser extent, machinery, are the most exposed sectors in Asia to the spillover effects.

“However, a rising level of exports from some other Asian economies to the US will remain a mitigating factor, with US importers diverting some trade away from China to Taiwan and Korea for electronic components, and to Vietnam and Malaysia for semiconductor devices,“ added Taylor.

Some Asian exporters have also gained share in the trade of consumer goods such as bicycles, handbags, furniture, clothing and footwear to the US.

“If US importers gradually seek alternative sources of final consumer goods from the rest of Asia to circumvent the direct tariffs on these imports from China, the substitution effect will be credit positive for Asian exporters in these sectors,“ said George Xu, a Moody’s analyst, and co-author of the report.

“However, if the additional US tariffs trigger a gradual trade rerouting by Chinese consumer goods exporters to other Asian markets, domestic producers in those markets with greater local exposure and more replaceable products would likely face increased competition,“ added Xu.

Moody’s report takes a bottom-up approach to identify sectors with the highest exposure to spillover risks from a prolonged US-China trade dispute and from China’s continued economic slowdown.